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Aim: What is the nature of Demand? • Do Now: You are trying to Aim: What is the nature of Demand? • Do Now: You are trying to buy item _(fill in with an item you desperately want). You find a merchant willing to sell you that item. All you have on you to trade for it is cup of water and a diamond. Which is the merchant going to want in exchange for giving you the item? Why? HW: Review pages 78 -83. 3|1

DIAMOND/WATER PARADOX OR THE PARADOX OF VALUE “nothing is more useful than water; but DIAMOND/WATER PARADOX OR THE PARADOX OF VALUE “nothing is more useful than water; but it will purchase scarce anything; scarce anything can be had in exchange for it. A diamond, on the contrary, has scarce any value in use; but a very great quantity of other goods may frequently be had in exchange for it. ” Adam Smith Paraphrase of this quote. 3|2

Diamond-Water Paradox • Even though the merchant wanted the Diamond • It is the Diamond-Water Paradox • Even though the merchant wanted the Diamond • It is the Water he needs to survive! Diamonds are worth more and cost more money even though they are less useful than water! So is Demand=the amount of a good or service that people are willing to purchase at every possible price during a specified time. Why is water less money than a diamond even though it is more useful? 3|3

 • ABUNDANCE! • Price is related to how much of something exists-we will • ABUNDANCE! • Price is related to how much of something exists-we will return to this idea tomorrow 3|4

MARKETS AND COMPETITION • A market is a group of buyers and sellers of MARKETS AND COMPETITION • A market is a group of buyers and sellers of a particular good or service. • The terms supply and demand refer to the behavior of people. . . as they interact with one another in markets. 3|5

Markets 3|6 Markets 3|6

LAW OF DEMAND - FIRST USED BY ECONOMIST ALFRED MARSHALL IN HIS 1890 ECONOMICS LAW OF DEMAND - FIRST USED BY ECONOMIST ALFRED MARSHALL IN HIS 1890 ECONOMICS TEXTBOOK Law of Demand - The quantity that people are willing and able to purchase during a particular period of time decreases as the price of that good or service rises and the quantity bought increases as the price falls, everything else held constant. The negative relationship between price and quantity demanded. As price rises, quantity demanded decreases. As price falls, quantity demanded increases Depicts the quantity-price relationship with all else assumed to be constant (Ceteris Paribus) 3|7

Create a law of demand graph! • Make the X axis the quantity bought. Create a law of demand graph! • Make the X axis the quantity bought. • Make the Y axis the price • Draw a graph in your notes. 3|8

THE DEMAND CURVE 3|9 THE DEMAND CURVE 3|9

Price and Quantity Demanded: The Law of Demand • A demand schedule is a Price and Quantity Demanded: The Law of Demand • A demand schedule is a table showing how much of a given product a household would be willing to buy at different prices. • Demand curves are usually derived from demand schedules. 3 | 10

Price and Quantity Demanded: The Law of Demand • The demand curve is a Price and Quantity Demanded: The Law of Demand • The demand curve is a graph illustrating how much of a given product a household would be willing to buy at different prices. • This means that demand curves slope downward. 3 | 11

From Household Demand to Market Demand Market demand schedule is the quantities demanded at From Household Demand to Market Demand Market demand schedule is the quantities demanded at each price by all consumers in the market. 3 | 12

In Groups: Create your own Market Demand Schedule for an item of your choice. In Groups: Create your own Market Demand Schedule for an item of your choice. • First: Create a table with the different costs of your item in one column, and the expected quantity sold in the other. • Then graph your item- just like Anna’s phone calls. Make the x axis-quantity demanded, make the y axis the price paid 3 | 13

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Summary: • There is an inverse relationship between quantity sold and price of the Summary: • There is an inverse relationship between quantity sold and price of the item. • Can you think of any exceptions to this rule? 3 | 16

Aim: How does the Income and Substitution effects alter our behavior in the market? Aim: How does the Income and Substitution effects alter our behavior in the market? • Do Now: It is in the midst of an economic recession and suddenly your boss cuts your salary! How will your behavior in the market change? List three ways! • HW: Chapter 4 sec 2, Read 85 -89 Copy and answer 1 -6 pg 88 3 | 17

EFFECTS ON THE LAW OF DEMAND – WHY IS THE LAW OF DEMAND AN EFFECTS ON THE LAW OF DEMAND – WHY IS THE LAW OF DEMAND AN INVERSE RELATIONSHIP? 1. At lower prices existing demanders buy more. 2. At lower prices, new demanders, enter the market. PURCHASING POWER – the amount of money, or income, that people have available to spend on goods and services is called their PURCHASING POWER 3 | 18

INCOME EFFECT 3. –As prices increase-purchasing power decreases. As prices decrease-purchasing power increases Leads INCOME EFFECT 3. –As prices increase-purchasing power decreases. As prices decrease-purchasing power increases Leads to the Law of demand- lower prices equal higher demand vice versa 3 | 19

Income Effect Cont. . • You have 30 dollars to spend: • If CDS Income Effect Cont. . • You have 30 dollars to spend: • If CDS cost from 10 to 15 dollars you can by two-three CDs • If Cds rise to 30 dollars each you can buy 1. Purchasing power has declined 3 | 20

EFFECTS ON THE LAW OF DEMAND – WHY IS THE LAW OF DEMAND AN EFFECTS ON THE LAW OF DEMAND – WHY IS THE LAW OF DEMAND AN INVERSE RELATIONSHIP? 4. SUBSTITUTION EFFECT – describes the tendency of consumers to substitute a similar, lower-priced product for another product that is relatively more expensive – Price of steak increases – people buy more chicken or fish – Price of milk increases – not likely to cause consumers to switch to a substitute – Generic Products –non-brand products 3 | 21

Final Application: Substitutions • What are some substitutions you are making in today’s recession Final Application: Substitutions • What are some substitutions you are making in today’s recession economy? • Create a list 3 | 22

Aim: Why do demand curves shift? • Do Now: What are other factors that Aim: Why do demand curves shift? • Do Now: What are other factors that influence your decision to purchase an item besides price? 3 | 23

Factors that Shift the Entire Demand Curve. How does our list relate? Number Of Factors that Shift the Entire Demand Curve. How does our list relate? Number Of Buyers Consumer Income Demographics Price of Related Goods Demand Tastes And Preferences Expectations 3 | 24

Changes in Demand Quantity Demanded Change in Quantity Demanded - movement along the same Changes in Demand Quantity Demanded Change in Quantity Demanded - movement along the same demand curve in response to a price change. Changes in price affect the quantity demanded period. (CP)-Ex-price of Pizza goes up, Ms. Pagliaro eats less slices… Change in Demand altogether- shift in entire demand curve in response to a change in a determinant of demand. Changes in income, wealth, other prices, tastes, or expectations affect demand. Basically the factors we saw on the previous slide. 3 | 25

Number of buyers An increase in the number of potential buyers will increase the Number of buyers An increase in the number of potential buyers will increase the demand for the good. • For example, the demand for land increases as the population increases. • Similarly baseball tickets are generally more expensive in larger cities. (Demographics) Baby Boomers retirement– medical care and social security. Can we think of other examples where an increase in buyers led to a demand change? 3 | 26

Expectations - Future Prices • An increase in the expected future price of a Expectations - Future Prices • An increase in the expected future price of a good increases current demand. • Ex: gasoline- if you know the price is going to go up next week, you may fill up this week. • Another example, when a good is temporarily put on sale, people stock up on the good • A decrease in the expected future price of a good decreases current demand. • . 3 | 27

Taste and Preferences Demand Shift for i. Pods Tastes and preferences for more mobile Taste and Preferences Demand Shift for i. Pods Tastes and preferences for more mobile and more powerful music players resulted in the success of the i. Pod and the demise of the Walkman. Front view portrait of young woman listening to music with headphones 3 | 28

Shift of Demand Versus Movement Along a Demand Curve • A change in demand Shift of Demand Versus Movement Along a Demand Curve • A change in demand is not the same as a change in quantity demanded. • A higher price causes lower quantity demanded and a move along the demand curve DA. • Changes in determinants of demand, other than price, cause a change in demand, or a shift of the entire demand curve, from DA to 3 | 29 D.

Determinants of Demand Changes in income – for most products a rise in income Determinants of Demand Changes in income – for most products a rise in income causes an increase in demand. If you expect your income to rise, you may consume more now. 3 | 30

Types of Goods • Normal Goods or Superior goods are goods for which demand Types of Goods • Normal Goods or Superior goods are goods for which demand goes up when income is higher and for which demand goes down when income is lower. (vacations) • Inferior Goods are goods for which demand falls when income rises. (generic brands) • Neutral Good – A good the demand for which does not change as income rises or falls. (milk) 3 | 31

Activity: Create a list of Normal, Inferior, and Neutral goods Normal Goods: Inferior Neutral Activity: Create a list of Normal, Inferior, and Neutral goods Normal Goods: Inferior Neutral 3 | 32

The Impact of an Increase in Income • Higher income decreases the demand for The Impact of an Increase in Income • Higher income decreases the demand for an inferior good • Higher income increases the demand for a normal good 3 | 33

Substitutes V. S. Sony 3 | 34 Substitutes V. S. Sony 3 | 34

Other Determinants of Household Demand Complements goods that “go together”; a decrease in the Other Determinants of Household Demand Complements goods that “go together”; a decrease in the price of one results in an increase in demand for the other, and vice versa. (Ex: Ketchup and Hot Dog Buns). 3 | 35

Complements V. S. 3 | 36 Complements V. S. 3 | 36

The Impact of a Change in quantity Demand of one item on the overall The Impact of a Change in quantity Demand of one item on the overall demand curve of another. • Demand for complement good (ketchup) shifts left • Price of hamburger rises • Quantity of hamburger demanded per month falls • Demand for substitute good (chicken) shifts right 3 | 37

A Change in Demand Versus a Change in Quantity Demanded To summarize: Change in A Change in Demand Versus a Change in Quantity Demanded To summarize: Change in price of a good or service leads to Change in quantity demanded (Movement along the curve). Change in income, preferences, or prices of other goods or services leads to Change in demand (Shift of curve). 3 | 38

Summary Self Test on Demand • As Sandi’s income rises, her demand for popcorn Summary Self Test on Demand • As Sandi’s income rises, her demand for popcorn rises. As Mark’s income falls, his demand for prepaid telephone cards rises. What kinds of goods are popcorn and telephone cards for the people who demand each? • Why are demand curves downward sloping? • Give an example that illustrates how to derive a market demand curve. • What factors can change demand? • What factors can change quantity demanded? 3 | 39